OIG Blog Entries from March 2013

The federal government ships a considerable number of packages each year, primarily using FedEx and UPS. In fiscal year 2012, federal agencies spent almost $337 million on shipping services through General Services Administration (GSA) contracts. The U.S. Postal Service earned only $4.8 million of that revenue, or less than 2 percent, a recent Office of Inspector General audit report found.

The Postal Service faces several challenges to growing its share of this market. Unlike its competitors, the Postal Service cannot offer necessary discounts to penetrate a market, attract new customers, or match competitors’ prices. In addition, the Postal Service’s lack of a guaranteed 2-day or 3-day express delivery product prevented it from qualifying for one of the GSA’s most lucrative contracts. Priority Mail regularly meets 2-day and 3-day delivery performance (90 percent of the time), but it did not qualify because it does not include a delivery guarantee.

As a late entrant to the GSA market, the Postal Service is at a distinct disadvantage. FedEx and UPS have been vendors since 2001, nearly 8 years longer than the Postal Service, and they have built solid relationships with the federal agencies. The OIG audit report noted that many federal agencies are reluctant to leave these long-term relationships and switch to the Postal Service. Further, the Postal Service does not always accept the payment methods desired by customers, forcing federal agencies that ship with the Postal Service via a GSA contract to use one of its four payment methods. Its competitors accept multiple payment methods, such as electronic billing data files.

At least one federal agency had specific requirements that disqualified the Postal Service from participating. The audit found that the U.S. Department of Defense (DoD) provides preferential treatment to those shippers that have their own aircraft and participate in the Civil Reserve Air Fleet (CRAF) program. Because the Postal Service does not own aircraft, it is prohibited from competing for DoD business allocated to CRAF participants, even when demonstrating lower prices.

The OIG audit concluded that the Postal Service could capture a larger share of the federal shipping market if it could overcome these challenges. We would like to hear your ideas. What are some ways the Postal Service might be able to increase its shipping sales to federal agencies? How best might the Postal Service overcome some of the considerable challenges noted in the audit report?

The U.S. Postal Service adds more than 600,000 new delivery points each year, mostly in the form of new residential homes. While most new residences include cluster boxes rather than to-the-door delivery to reduce costs, delivery remains the Postal Service's largest cost center. Canada Post, which has suffered losses recently after years of profits, has introduced a $200 per address charge that it is assessing housing developers for installing community mailboxes. Canada Post claims the charge “is in keeping with how other infrastructure costs are shared by utilities and other services." Canada Post, which adds almost 200,000 new addresses a year, could earn tens of millions of dollars from the fee and it would offset the added costs of new delivery points. Housing developers in Canada have been fighting the charge, arguing that it is unfair to assess new homes only, which they say receive substandard delivery service compared to older homes and apartment buildings that get delivery to the door. In the United States, the Postal Service does not charge a fee to set-up and deliver to a new address. New delivery points are generally more profitable than old ones because they generate on average more volume and revenue and they cost less due to the increased use of lower cost options such as curbside and cluster boxes. Still, other utilities, such as gas, electric, and cable companies, charge customers a new service fee when they move or start service. Cities and counties also often charge an administrative fee for services, such as water, when a customer changes or adds a new address, sometimes in the $50 range. The City of Mountain View, CA, charges a hefty administrative fee of $195 to change or add a new address. Should the Postal Service recover the costs associated with new delivery points by charging customers a one-time “set-up” fee for their new home or business location? Or does that effectively penalize a new homeowner for receiving what is usually a more cost-effective form of delivery (cluster boxes)? If the Postal Service were to charge, should it only charge for the administrative costs it incurs to set up new addresses, such as completing and reviewing Postal Service forms and updating to the Address Management System and Delivery Sequence File? Should it charge the developer as Canada Post is doing? Or should it retain the status quo and keep it so that costs are shared by all ratepayers? Are there other solutions?

Powerful forces like globalization and the digital revolution are changing how, when, and where things are produced, purchased, and delivered. Look at how our shopping habits have changed in just the past few years. With your smartphone or tablet you can shop anytime, anyplace. Offshore production trends are reversing, and some manufacturing jobs are returning to the United States. And major urban areas continue to grow and link into a global transportation supergrid that connects people, commerce, and ideas. If you’re left off the grid, you could find yourself disconnected from the new global economy.

The U.S. Postal Service Office of Inspector General recently released a white paper discussing the new logistics revolution and all the challenges and opportunities it presents — The Global Logistics Revolution: A Pivotal Moment for the Postal Service. The paper asks, in the face of all these changes, how can we make sure citizens and commerce continue to thrive? Perhaps postal organizations – here and around the world – have a key role to play. Some foreign posts already provide an array of logistics services ranging from comprehensive warehousing to customized, end-to-end cross-border and returns solutions that better serve customers and the new global economy. For some of these posts, these “value-added” logistics services are providing a new revenue stream to offset steep declines in traditional mail volume.

The Postal Service is also well positioned to move into the large and fast-growing logistics market. With its extensive first and last-mile reach to nearly every household and business in the United States and mission to “bind the nation together” through communications and commerce, the Postal Service is unmatched in keeping communities connected. Either on its own or by partnering with private sector companies, the Postal Service could offer a range of new services and products to meet the evolving needs of citizens and business across the country. A service could be as basic as comprehensive track and trace to more complex offerings like warehousing solutions. If the Postal Service does not at least keep up with emerging customer expectations for improved and expanded logistics services, it could jeopardize its position in the evolving expedited and small package market.

We encourage you to read the white paper to learn about how the Postal Service could respond to the Global Logistics Revolution and then weigh in with your thoughts below.

Do you think that the Postal Service’s ability to offer new, value-added logistics services could help respond to customers’ changing needs?

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